Terms and Conditions for Advances

FEDERAL HOUSING FINANCE BOARD

12 CFR Part 935

[No. 96-47]

Terms and Conditions for Advances

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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SUMMARY: The Board of Directors of the Federal Housing Finance Board

(Finance Board) is proposing to amend its regulation on terms and

conditions for advances. The proposed rule requires a Federal Home Loan

Bank (FHLBank) that wants to make putable advances available to member

institutions to provide appropriate disclosures and to offer

replacement advance funding if the FHLBank terminates the putable

advance prior to its stated maturity date.

DATES: Comments on this proposed rule must be received in writing on or

before September 3, 1996.

ADDRESSES: Mail comments to Elaine L. Baker, Executive Secretary,

Federal Housing Finance Board, 1777 F Street, N.W., Washington, D.C.

20006. Comments will be available for public inspection at this

address.

FOR FURTHER INFORMATION CONTACT: Christine M. Freidel, Assistant

Director, Financial Management Division, Office of Policy, (202) 408-

2976, or, Janice A. Kaye, Attorney-Advisor, Office of General Counsel,

(202) 408-2505, Federal Housing Finance Board, 1777 F Street, N.W.,

Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

Under section 10 of the Federal Home Loan Bank Act (Bank Act), each

FHLBank has the authority to make secured advances to its members. See

12 U.S.C. 1430. To ensure that the FHLBanks operate their advance

programs in a safe and sound manner, id. Sec. 1422a(a)(3)(A), and

pursuant to its authority to supervise the FHLBanks and ensure that the

FHLBanks carry out their housing finance mission and remain adequately

capitalized and able to raise funds in the capital markets, id.

Sec. 1422a(a)(3)(B), the Finance Board promulgated a final rule

governing FHLBank advance programs in May 1993. See 58 FR 29456 (May

20, 1993), codified at 12 CFR part 935.

Since that time, the FHLBanks have developed a new type of advance

\1\ product called a ``putable advance.'' A ``putable advance'' is an

advance that a FHLBank may, at its discretion, terminate and put back

to the member for immediate repayment after a specified period of time

and on certain dates prior to the maturity date of the putable advance.

A member borrowing a putable advance faces the risk that the FHLBank

will exercise its discretion and terminate the putable advance prior to

its maturity date. For example, a FHLBank might terminate a putable

advance prior to its maturity date in a rising interest rate

environment. Any replacement advance funding offered to the member

would be extended at then current higher market interest rates. Since

the member takes on the interest rate risk associated with putable

advances, the FHLBank is able to offer advance funding at an interest

rate that can be significantly lower than the market interest rate.

Members have expressed considerable interest in taking advantage of the

lower cost funding a FHLBank can offer through putable advances.

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\1\ An ``advance'' is a loan from a FHLBank that is provided

pursuant to a written agreement, supported by a note or other

written evidence of the borrower's obligation, and fully secured by

collateral in accordance with the Bank Act and Finance Board

regulations. See 12 CFR 935.1.

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The Finance Board's advances regulation does not address putable

advances, and the practices with respect to this type of advance

funding vary from FHLBank to FHLBank. To provide for consistency among

the FHLBanks that offer putable advances and to reinforce the role of

the FHLBanks as sources of liquidity for member institutions, the

Finance Board is proposing to amend its advances regulation to address

specifically the issuance of putable advances. The Finance Board

requests comment on any aspect of this proposed rule.

II. Analysis of the Proposed Rule

The Finance Board proposes to add a new paragraph (d), putable

advances, to Sec. 935.6 of its advances regulation, which concerns the

terms and conditions for advances. To ensure that members are fully

apprised of the risks associated with putable advance funding, proposed

Sec. 935.6(d)(1) would require a FHLBank that provides a putable

advance to a member to disclose in writing to such member the risks

associated with putable advance funding. Such risks include the

interest rate risk described above in section I and the potentially

adverse impact on a member's liquidity if a FHLBank exercises its

discretion to terminate a putable advance prior to the stated maturity

date. To preclude the possibility that putable advance funding might

cause undue liquidity problems for members, proposed Sec. 935.6(d)(2)

would require a FHLBank that terminates a putable advance prior to its

maturity date to offer replacement funding to the member at current

market rates for the remaining term to maturity of the putable advance.

The replacement funding would be considered a conversion of the putable

advance rather than the extension of a new advance.

Proposed Sec. 935.6(d)(3) provides a definition of the term

``putable advance.'' For purposes of proposed Sec. 935.6(d), a putable

advance would mean an advance that a FHLBank may, at its discretion,

terminate and require the member to repay prior to the stated maturity

date of the putable advance.

III. Regulatory Flexibility Act

This proposed rule contains only technical revisions to an existing

rule and, therefore, does not impose any additional regulatory

requirements on small entities. Thus, in accordance with the provisions

of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., the Board of

Directors of the Finance Board hereby certifies that this proposed

rule, if promulgated as a final rule, will not have a significant

economic impact on a substantial number of small entities. Id. section

605(b).

List of Subjects in 12 CFR Part 935

Credit, Federal home loan banks.

Accordingly, the Board of Directors of the Federal Housing Finance

Board hereby proposes to amend chapter IX, title 12, part 935, Code of

Federal Regulations, as follows:

PART 935--ADVANCES

1. The authority citation for part 935 continues to read as

follows:

Authority: 12 U.S.C. 1422b(a)(1), 1426, 1429, 1430, 1430(b), and

1431.

2. In Sec. 935.6, paragraph (d) is added to read as follows:

Sec. 935.6 Terms and conditions for advances.

* * * * *

(d) Putable advances. (1) A Bank that provides a putable advance to

a member shall disclose in writing to such member

[[Page 40365]]

the risks associated with putable advance funding.

(2) If a Bank terminates a putable advance prior to the stated

maturity date of such advance, the Bank shall offer to provide market

rate replacement funding to the member for the remaining term to

maturity of the putable advance.

(3) For purposes of this paragraph (d), the term putable advance

means an advance that a Bank may, at its discretion, terminate and

require the member to repay prior to the stated maturity date of the

advance.

Dated: July 3, 1996.

By the Board of Directors of the Federal Housing Finance Board.

Bruce A. Morrison,

Chairperson.

[FR Doc. 96-19526 Filed 8-01-96; 8:45 am]

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